Mid-America Apartment Communities: Too Rich

Summary

• Mid-America Apartment Communities is an interesting prospect for REIT enthusiasts.
• With the quality the company offers to prospective investors, it could be a solid long-term play.
• However, shares are just very pricey at this time.
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One attractive area for REIT investors is the multifamily space. There are a number of companies operating in this niche, though not all of them are fundamentally appealing and trading at reasonable prices. One example of a participant in the space that has done well for itself in recent years, but whose shares are trading any rather mixed level, is Mid-America Apartment Communities (NYSE:MAA). With most of its assets located around the Sunbelt, the company is a quality player in the space, and its fundamental data supports this statement. Having said that though, investors are being asked to pay a high price to participate in the company's future prospects. For some, this price might be justifiable, though for many others who fashion themselves value investors, opportunities exist elsewhere.

A Look at Mid-America

Mid-America has its business located across approximately 300 communities throughout the United States. In all, the REIT has 100,490 units in these communities. Their largest area of concentration is Atlanta, Georgia, which in the fourth quarter of last year accounted for 12.8% of its NOI, or net operating income. Its second largest market is Dallas, Texas, which is responsible for 8.6% of its business. And Tampa, Florida is in third place at 6.8%. In all, it's top ten markets account for 67.1% of its NOI.

*Taken from Mid-America Apartment Communities

The multifamily properties that Mid-America owns are split into three different categories. 64% of them are classified as Garden locations. A further 32% our mid-rise. And the remaining 4% are high-rise. As of the end of its 2020 fiscal year, the company boasted a high occupancy rate of 95.6%. That alone underscores the quality of the assets that it owns. In addition to the units that it already has, the company is investing in growing and improving its properties. At present, it has 8 new projects aimed for what it calls repositioning. It has 13,301 units in its redevelopment pipeline on top of that.

From the redevelopment pipeline alone, it expects to generate $17.3 million in incremental revenue. All of this is on top of the 20,695 units redeveloped over the past three years. And in 2021, the company expects to add a further 6,000 to 7,000 of these to its roster. Average cost per redevelopment will be between $6,500 and $7,500. But in exchange, the company expects to be able to increase its average rent take by between 9% and 10%. Another big initiative implemented by management has been its smart home technology rollout. In 2020, it implemented this in 24,000 of its units. And in 2021, in expects to implement this in between 20,000 and 25,000 units.

This is a rather simple change that involves the hooking up of some technology. Examples of the end result include allowing tenants to control lighting, the temperature, and more, all through a mobile app. Management expects to be able to increase rent by a further $25 per unit per month as a result of these add-ons. While this may not sound like much, hitting the high end of its expectations for 2021 will result in extra annual revenue for the business of $7.5 million. Applied to all of its units, the end result will be incremental revenue of $30.15 million, most of which should be all profit after factoring in installation costs.

Despite a rather difficult 2020 caused by the COVID-19 pandemic, Mid-America continued to grow. The company generated revenue of $1.68 billion for the year. This was up from $1.64 billion seen in 2019. To put all of this in perspective, back in 2016, the company generated a revenue of $1.13 billion. Every year from then through 2020, revenue increased. This is a great thing for investors to see, but it should be noted then that all financial metrics behaved in the same way.

Consider, for instance, the firm's FFO, or funds from operations. After rising from $463.39 million in 2016 to $773.19 million in 2019, this metric dipped to $765.29 million in 2020. Another metric that declined modestly during the year was EBITDA. According to my abstinence, this figure totaled $945.28 million in 2020. This compares to $958.54 million in 2019. Admittedly, the general trend over time has still been toward annual increases in this metric. So because of that, investors probably should see this as a bump in the road. Other metrics fared better. NOI, as an example, has to continue to expand year after year. In 2016, the figure was $702 million. This increased to $1.03 billion in 2019, and again to $1.04 billion in 2020. Operating cash flow has also trended higher, rising from $485 million in 2016 to $781.42 million in 2019. By 2020, this had increased to $823.95 million.

Management has not provided a great deal of transparency regarding their expectations for the company's 2021 fiscal year, but they have provided more than most firms do. They expect average physical occupancy to be around 95.5%. At the mid-point, revenue should expand by 2%. And NOI should rise, at the mid-point, by 1%. If this comes to fruition, it would work out to NOI of $1.05 billion.

All of this performance over time has been great. However, the market recognizes this, and demands a hefty price for investors who wish to participate and further the upside potential. To see this, we need only look in see where shares are trading. On a price to operating cash flow basis, the company is trading at a multiple of 20.5. Its price to FFO multiple is 22. And its price to NOI multiple stands at 16.2. On a forward basis, this decreases to 16.1. On an EV to EBITDA basis, the company has a multiple of 22.7.

To put this all in perspective, I looked at the five highest rated companies that are considered comparable with Mid-America, as defined by Seeking Alpha’s Quant platform. What I found was that four of the five firms were trading at a price to operating cashflow multiple of between 10 and 26.7. This definitely places Mid-America toward the middle, but on an absolute basis, this is not a cheap stock. On an EV to EBITDA basis, its four peers are trading between 22.3 and 32.8. This definitely places Mid-America near the low end of this range. But once again, that just makes it cheap relative to its peers, and ignores the fact that on an absolute basis it does not look cheap.

Takeaway

Putting all of the data together, it is clear that Mid-America is a prospect that certain types of investors might enjoy. In particular, those who don't mind paying a hefty price because they are in it for the long haul, and they believe in the company's asset quality. However, for many investors, myself included, this is just too rich a price to pay. Because of this, I will take a pass for now, but if shares of the firm do fall materially at some point in the future, it will be on my list of ones to consider.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Humble_Modesty]

Believe demand for rentals will increase and hasn’t yet been priced in to apt reits.

[SilverBandit]

Still a buy for its dividend.

[gastro4]

Have been long for years as I like the apartment REIT category. Would you suggest any apartment REITs that are better values now.

[CRE Investor]

@gastro4 Not the author, but I recently sold MAA at $145 because I also felt like it was fully valued. CPT is the closest peer to MAA and appears to be trading at roughly the same P/AFFO currently, but with a slightly higher dividend yield as of today. However, I've seen CPT discounted more over the past two years than MAA, so you might find an opportunity on a dip. I also like NXRT. They focus on most of the same markets as MAA but they are smaller and are highly focused on the value-add strategy of fixing up Class B units and raising rents upon completion. That one has been more of a growth stock and has a similar, but faster growing dividend than MAA. BRG and IRT are two others focused on the Sun Belt region. I've owned both in the past, but feel that they are not as well-managed and/or have excessive debt vs. peers. Long: CPT and NXRT.

[gastro4]

@CRE Investor thanks for the thoughts.